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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number 001-31568

 


 

New England Realty Associates Limited Partnership

(Exact name of registrant as specified in its charter)

 

 

 

 

Massachusetts

 

04-2619298

(State or other jurisdiction of

 

(I.R.S. employer

incorporation or organization)

 

identification no.)

 

 

 

39 Brighton Avenue, Allston, Massachusetts

 

02134

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (617) 783-0039

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

As of November 3, 2017, there were 99,509 of the registrant’s Class A units (2,985,282 Depositary Receipts) of limited partnership issued and outstanding and 23,633 Class B units issued and outstanding.

 

 

 


 

Table of Contents

NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP

 

INDEX

 

 

 

 

PART I—FINANCIAL INFORMATION 

Item 1. 

Financial Statements (Unaudited)

3

 

Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

4

 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016

5

 

Consolidated Statements of Changes in Partners’ Capital for the Nine Months ended September 30, 2017 and 2016

6

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016

7

 

Notes to Consolidated Financial Statements

8

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4. 

Controls and Procedures

39

PART II—OTHER INFORMATION 

Item 1. 

Legal Proceedings

40

Item 1A. 

Risk Factors

40

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

40

Item 3. 

Defaults Upon Senior Securities

40

Item 4. 

Mine Safety Disclosure

40

Item 5. 

Other Information

41

Item 6. 

Exhibits

41

SIGNATURES 

43

 

 

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NEW ENGLAND REALTY ASSOCIATES, L.P.

 

PART 1 -- FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

The accompanying unaudited consolidated balance sheets, statements of income, changes in partners’ capital, and cash flows and related notes thereto, have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements.  The financial statements reflect all adjustments consisting only of normal, recurring adjustments, which are, in the opinion of management, necessary for a fair presentation for the interim periods.

 

The consolidated balance sheet as of December 31, 2016 has been derived from the audited consolidated balance sheet at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

 

The aforementioned financial statements should be read in conjunction with the notes to the aforementioned financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in New England Realty Associates L.P.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

The results of operations for the three and nine month periods ended September 30, 2017 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period.

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2017

    

2016

 

ASSETS

 

 

  (Unaudited)

 

 

 

 

Rental Properties

 

$

209,149,689

 

$

169,462,811

 

Cash and Cash Equivalents

 

 

14,913,412

 

 

7,463,697

 

Rents Receivable

 

 

559,048

 

 

567,627

 

Insurance Recovery Receivable

 

 

46,889

 

 

700,932

 

Real Estate Tax Escrows

 

 

481,982

 

 

444,625

 

Prepaid Expenses and Other Assets

 

 

4,180,236

 

 

3,585,870

 

Investments in Unconsolidated Joint Ventures

 

 

8,452,484

 

 

8,336,505

 

Total Assets

 

$

237,783,740

 

$

190,562,067

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

 

 

Mortgage Notes Payable

 

 

233,615,499

 

 

212,709,080

 

Notes Payable

 

 

25,000,000

 

 

 —

 

Distribution and Loss in Excess of Investment in Unconsolidated Joint Venture

 

 

2,737,854

 

 

2,577,606

 

Accounts Payable and Accrued Expenses

 

 

3,157,249

 

 

4,052,095

 

Advance Rental Payments and Security Deposits

 

 

5,649,396

 

 

5,448,011

 

Total Liabilities

 

 

270,159,998

 

 

224,786,792

 

Commitments and Contingent Liabilities (Notes 3 and 9)

 

 

 —

 

 

 —

 

Partners’ Capital 124,386 and 124,409 units outstanding in 2017 and 2016 respectively

 

 

(32,376,258)

 

 

(34,224,725)

 

Total Liabilities and Partners’ Capital

 

$

237,783,740

 

$

190,562,067

 

 

See notes to consolidated financial statements.

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

13,321,770

 

$

12,273,589

 

$

38,636,732

 

$

36,482,801

 

Laundry and sundry income

 

 

100,035

 

 

98,292

 

 

316,471

 

 

326,633

 

 

 

 

13,421,805

 

 

12,371,881

 

 

38,953,203

 

 

36,809,434

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Administrative

 

 

525,125

 

 

524,293

 

 

1,513,869

 

 

1,477,708

 

Depreciation and amortization

 

 

3,664,997

 

 

3,079,368

 

 

9,647,751

 

 

9,167,516

 

Management fee

 

 

544,399

 

 

511,730

 

 

1,599,647

 

 

1,513,226

 

Operating

 

 

1,051,910

 

 

995,787

 

 

3,797,935

 

 

3,489,724

 

Renting

 

 

301,423

 

 

301,696

 

 

482,157

 

 

544,923

 

Repairs and maintenance

 

 

2,678,780

 

 

2,364,364

 

 

6,187,673

 

 

6,185,250

 

Taxes and insurance

 

 

1,727,218

 

 

1,496,807

 

 

5,083,674

 

 

4,684,062

 

 

 

 

10,493,852

 

 

9,274,045

 

 

28,312,706

 

 

27,062,409

 

Income Before Other Income (Expense)

 

 

2,927,953

 

 

3,097,836

 

 

10,640,497

 

 

9,747,025

 

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

416

 

 

305

 

 

1,132

 

 

710

 

Interest expense

 

 

(3,046,818)

 

 

(2,553,771)

 

 

(8,113,197)

 

 

(7,650,096)

 

Income  from investments in unconsolidated joint ventures

 

 

990,169

 

 

562,584

 

 

2,721,231

 

 

1,220,666

 

Gain on the sale of real estate

 

 

 —

 

 

103,793

 

 

 —

 

 

103,793

 

 

 

 

(2,056,233)

 

 

(1,887,089)

 

 

(5,390,834)

 

 

(6,324,927)

 

Net Income

 

$

871,720

 

$

1,210,747

 

$

5,249,663

 

$

3,422,098

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income per Unit

 

$

7.01

 

$

9.69

 

$

42.20

 

$

27.38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Number of Units Outstanding

 

 

124,387

 

 

124,923

 

 

124,394

 

 

124,995

 

 

See notes to consolidated financial statements.

 

 

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Units

 

Partners’s Capital

 

 

 

Limited

 

General

 

 

 

Treasury

 

 

 

Limited

 

General

 

 

 

 

 

  

Class A

  

Class B

  

Partnership

  

Subtotal

  

Units

  

Total

  

Class A

  

Class B

  

Partnership

  

Total

 

Balance January 1, 2016

 

144,180

 

34,243

 

1,802

 

180,225

 

54,851

 

125,374

 

$

(24,673,535)

 

$

(5,830,548)

 

$

(306,870)

 

$

(30,810,953)

 

Distribution to Partners

 

 

 

 

 

 —

 

 

 

(2,248,621)

 

 

(534,047)

 

 

(28,108)

 

 

(2,810,776)

 

Stock Buyback

 

 

 

 

 

451

 

(451)

 

 

(558,723)

 

 

(128,874)

 

 

(6,783)

 

 

(694,380)

 

Net Income

 

 

 

 

 

 —

 

 

 

2,737,678

 

 

650,199

 

 

34,221

 

 

3,422,098

 

Balance September 30, 2016

 

144,180

 

34,243

 

1,802

 

180,225

 

55,302

 

124,923

 

$

(24,743,201)

 

 

(5,843,270)

 

 

(307,540)

 

 

(30,894,011)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1 , 2017

 

144,180

 

34,243

 

1,802

 

180,225

 

55,816

 

124,409

 

$

(27,407,924)

 

$

(6,475,961)

 

$

(340,840)

 

$

(34,224,725)

 

Distribution to Partners

 

 

 

 

 

 —

 

 

 

(2,686,919)

 

 

(638,143)

 

 

(33,586)

 

 

(3,358,648)

 

Stock Buyback

 

 

 

 

 

23

 

(23)

 

 

(34,038)

 

 

(8,084)

 

 

(426)

 

 

(42,548)

 

Net Income

 

 

 

 

 

 

 

 

 

4,199,730

 

 

997,436

 

 

52,497

 

 

5,249,663

 

Balance September 30, 2017

 

144,180

 

34,243

 

1,802

 

180,225

 

55,839

 

124,386

 

$

(25,929,151)

 

$

(6,124,752)

 

$

(322,355)

 

$

(32,376,258)

 

 

See notes to consolidated financial statements.

 

 

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

    

2017

    

2016

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net income

 

$

5,249,663

 

$

3,422,098

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

 

 

Depreciation and amortization

 

 

9,647,751

 

 

9,167,516

 

Amortization of deferred financing costs

 

 

141,404

 

 

141,122

 

(Income)  from investments in joint ventures

 

 

(2,721,231)

 

 

(1,220,666)

 

Gain on sale of real estate

 

 

 —

 

 

(103,793)

 

Change in operating assets and liabilities

 

 

 

 

 

 

 

Decrease (Increase)   in rents receivable

 

 

8,579

 

 

(202,024)

 

(Decrease) in accounts payable and accrued expense

 

 

(552,022)

 

 

(1,760,588)

 

Decrease in insurance recovery receivable

 

 

311,218

 

 

190,781

 

(Increase)  in real estate tax escrow

 

 

(37,357)

 

 

(47,365)

 

(Increase) Decrease in prepaid expenses and other assets

 

 

(221,852)

 

 

498,350

 

Increase in advance rental payments and security deposits

 

 

201,385

 

 

77,127

 

Total Adjustments

 

 

6,777,875

 

 

6,740,460

 

Net cash provided by operating activities

 

 

12,027,538

 

 

10,162,558

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

Proceeds from unconsolidated joint ventures

 

 

4,901,250

 

 

2,346,829

 

Distribution in excess of investment in unconsolidated joint ventures

 

 

468,420

 

 

360,000

 

(Investment)  in unconsolidated joint ventures

 

 

(2,604,170)

 

 

(2,443,829)

 

Improvement of rental properties

 

 

(4,135,472)

 

 

(3,564,402)

 

Purchase of rental property

 

 

(45,571,670)

 

 

 —

 

Net proceeds from the sale of real estate

 

 

 —

 

 

772,336

 

Net cash (used in) investing activities

 

 

(46,941,642)

 

 

(2,529,066)

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Payment of financing costs

 

 

(176,250)

 

 

(174,718)

 

Proceeds of mortgage notes payable

 

 

22,250,000

 

 

20,071,000

 

Proceeds of note payable

 

 

41,000,000

 

 

 —

 

Payment of note payable

 

 

(16,000,000)

 

 

(25,000,000)

 

Principal payments of mortgage notes payable

 

 

(1,308,735)

 

 

(1,449,221)

 

Stock buyback

 

 

(42,548)

 

 

(694,380)

 

Distributions to partners

 

 

(3,358,648)

 

 

(2,810,776)

 

Net cash provided by (used in) financing activities

 

 

42,363,819

 

 

(10,058,095)

 

Net Increase  (Decrease) in Cash and Cash Equivalents

 

 

7,449,715

 

 

(2,424,603)

 

Cash and Cash Equivalents, at beginning of period

 

 

7,463,697

 

 

10,298,186

 

Cash and Cash Equivalents, at end of period

 

$

14,913,412

 

$

7,873,583

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

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NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

September 30, 2017

 

(Unaudited)

 

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

 

Line of Business:  New England Realty Associates Limited Partnership (“NERA” or the “Partnership”) was organized in Massachusetts in 1977. NERA and its subsidiaries own 26 properties which include 18 residential buildings; 4 mixed use residential, retail and office buildings; 3 commercial buildings and individual units at one condominium complex. These properties total 2,632 apartment units, 19 condominium units and 108,043 square feet of commercial space. Additionally, the Partnership also owns a 40- 50% interest in 9 residential and mixed use properties consisting of 739 apartment units, 12,500 square feet of commercial space and a 50 car parking lot. The properties are located in Eastern Massachusetts and Southern New Hampshire.

 

Basis of Presentation: The financial statements have been prepared in conformity with GAAP. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. These estimates and assumptions are based on management’s historical experience that are believed to be reasonable at the time. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgement. The Partnership’s critical accounting policies are those which require assumptions to be made about matters that are highly uncertain. Different estimates could have a material effect on the Partnership’s financial results. Judgements and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions and circumstances.

Principles of Consolidation:  The consolidated financial statements include the accounts of NERA and its subsidiaries. NERA has a 99.67% to 100% ownership interest in each subsidiary except for the nine limited liability companies (the “Investment Properties” or “Joint Ventures”) in which the Partnership has a 40 - 50% ownership interest. The consolidated group is referred to as the “Partnership”. Minority interests are not recorded, since they are insignificant. All significant intercompany accounts and transactions are eliminated in consolidation. The Partnership accounts for its investment in the above-mentioned Investment Properties using the equity method of consolidation. (See Note 14: Investment in Unconsolidated Joint Ventures).

 

The Partnership accounts for its investments in joint ventures using the equity method of accounting. These investments are recorded initially at cost, as Investments in Unconsolidated Joint Ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. Generally, the Partnership would discontinue applying the equity method when the investment (and any advances) is reduced to zero and would not provide for additional losses unless the Partnership has guaranteed obligations of the venture or is otherwise committed to providing further financial support for the investee. If the venture subsequently generates income, the Partnership only recognizes its share of such income to the extent it exceeds its share of previously unrecognized losses. In 2013 and beyond, the carrying values of investments fell below zero. We intend to fund our share of the investments’ future operating deficits should the need arise. However, we have no legal obligation to pay for any of the liabilities of such investments nor do we have any legal obligation to fund operating deficits. (See Note 14: Investment in Unconsolidated Joint Ventures.)

 

The authoritative guidance on consolidation provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise, if any, should consolidate the VIE (the “primary beneficiary”). Generally, the consideration of whether an entity is a VIE applies when either (1) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest, (2) the equity investment at risk is insufficient to finance that equity’s activities without additional subordinated financial support or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The primary beneficiary is defined by the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the

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variable interest entity’s performance; and (2) the obligation to absorb losses and rights to receive the returns from VIE that would be significant to the VIE.

 

Impairment:  On an annual basis management assesses whether there are any indicators that the value of the Partnership’s rental properties or investments in unconsolidated subsidiaries may be impaired. In addition to identifying any specific circumstances which may affect a property or properties, management considers other criteria for determining which properties may require assessment for potential impairment. The criteria considered by management include reviewing low leased percentages, significant near term lease expirations, recently acquired properties, current and historical operating and/or cash flow losses, near term mortgage debt maturities or other factors that might impact the Partnership’s intent and ability to hold property. A property’s value is impaired only if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the property over the fair value of the property. The Partnership’s estimates of aggregate future cash flows expected to be generated by each property are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and costs to operate each property. As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the future cash flows estimated by management in its impairment analyses may not be achieved.

 

Revenue Recognition:  Rental income from residential and commercial properties is recognized over the term of the related lease. For residential tenants, amounts 60 days in arrears are charged against income. The commercial tenants are evaluated on a case by case basis. Certain leases of the commercial properties provide for increasing stepped minimum rents, which are accounted for on a straight-line basis over the term of the lease. Contingent rent for commercial properties are received from tenants for certain costs as provided in the lease agreement. The costs generally include real estate taxes, utilities, insurance, common area maintenance and recoverable costs. Rental concessions are also accounted for on the straight-line basis.

 

Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the differences between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed-rate renewal options for below-market leases. The capitalized above-market lease values for acquired properties are amortized as a reduction of base rental revenue over the remaining term of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed-rate renewal options of the respective leases.

 

Rental Properties:  Rental properties are stated at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred; improvements and additions which improve or extend the life of the assets are capitalized. When assets are retired or otherwise disposed of, the cost of the asset and related accumulated depreciation is eliminated from the accounts, and any gain or loss on such disposition is included in income. Fully depreciated assets are removed from the accounts. Rental properties are depreciated by both straight-line and accelerated methods over their estimated useful lives. Upon acquisition of rental property, the Partnership estimates the fair value of acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities assumed, generally consisting of the fair value of (i) above and below market leases, (ii) in-place leases and (iii) tenant relationships. The Partnership allocated the purchase price to the assets acquired and liabilities assumed based on their fair values. The Partnership records goodwill or a gain on bargain purchase (if any) if the net assets acquired/liabilities assumed exceed the purchase consideration of a transaction. In estimating the fair value of the tangible and intangible assets acquired, the Partnership considers information obtained about each property as a result of its due diligence and marketing and leasing activities, and utilizes various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization rates, estimates of replacement costs net of depreciation, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.

 

Other intangible assets acquired include amounts for in-place lease values and tenant relationship values, which are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Partnership’s overall relationship with the respective tenant. Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs during hypothetical expected lease-up periods considering current market

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conditions, and costs to execute similar leases at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses. Characteristics considered by management in valuing tenant relationships include the nature and extent of the Partnership’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals. The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases. The value of tenant relationship intangibles are amortized to expense over the anticipated life of the relationships.

 

In the event that facts and circumstances indicate that the carrying value of a rental property may be impaired, an analysis of the value is prepared. The estimated future undiscounted cash flows are compared to the asset’s carrying value to determine if a write-down to fair value is required.

 

Leasing Fees:  Leasing fees are capitalized and amortized on a straight-line basis over the life of the related lease. Unamortized balances are expensed when the corresponding fee is no longer applicable.

 

Deferred Financing Costs:  Costs incurred in obtaining financing are capitalized and amortized over the term of the related indebtedness. Deferred financing costs are presented in the balance sheet as a direct deduction from the carrying value of the debt liability to which they relate, except deferred financing costs related to the revolving credit facility, which are presented in prepaid expenses and other assets. In all cases, amortization of such costs is included in interest expense and was approximately $141,000 and $141,000 for the nine months ended September 30, 2017 and 2016, respectively.

 

Income Taxes:  The financial statements have been prepared on the basis that NERA and its subsidiaries are entitled to tax treatment as partnerships. Accordingly, no provision for income taxes have been recorded (See Note 13).

 

Cash Equivalents:  The Partnership considers cash equivalents to be all highly liquid instruments purchased with a maturity of three months or less.

 

Segment Reporting:  Operating segments are revenue producing components of the Partnership for which separate financial information is produced internally for management. Under the definition, NERA operated, for all periods presented, as one segment.

 

Comprehensive Income:  Comprehensive income is defined as changes in partners’ equity, exclusive of transactions with owners (such as capital contributions and dividends). NERA did not have any comprehensive income items in 2017 or 2016 other than net income as reported.

 

Income (Loss) Per Depositary Receipt:  Effective January 3, 2012, the Partnership authorized a 3-for-1 forward split of its Depositary Receipts listed on the NYSE Amex and a concurrent adjustment of the exchange ratio of Depositary Receipts for Class A Units of the Partnership from 10-to-1 to 30-to-1, such that each Depositary Receipt represents one-thirtieth (1/30) of a Class A Unit of the Partnership. All references to Depositary Receipts in the report are reflective of the 3- for-1 forward split.

 

Income Per Unit:  Net income per unit has been calculated based upon the weighted average number of units outstanding during each period presented. The Partnership has no dilutive units and, therefore, basic net income is the same as diluted net income per unit (see Note 7: Partner’s Capital).

 

Concentration of Credit Risks and Financial Instruments:  The Partnership’s properties are located in New England, and the Partnership is subject to the general economic risks related thereto. No single tenant accounted for more than 5% of the Partnership’s revenues in 2017 or 2016. The Partnership makes its temporary cash investments with high-credit quality financial institutions. At September 30, 2017, substantially all of the Partnership’s cash and cash equivalents were held in interest-bearing accounts at financial institutions, earning interest at rates from 0.01% to 0.35%. At September 30, 2017 and December 31, 2016, respectively approximately $16,251,000, and $8,911,000 of cash and cash equivalents, and security deposits included in prepaid expenses and other assets exceeded federally insured amounts.

 

Advertising Expense:  Advertising is expensed as incurred. Advertising expense was $153,287 and $154,105 for the nine months ended September 30, 2017 and 2016, respectively.

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Interest Capitalized:  The Partnership follows the policy of capitalizing interest as a component of the cost of rental property when the time of construction exceeds one year. During the nine months ended September 30, 2017 and 2016 there was no capitalized interest.

 

Extinguishment of Debt:  When existing mortgages are refinanced with the same lender and it is determined that the refinancing is substantially different, then they are recorded as an extinguishment of debt. However if it is determined that the refinancing is substantially the same, then they are recorded as an exchange of debt. All refinancing qualify as extinguishment of debt.

 

Reclassifications:  Certain reclassifications have been made to prior period amounts in order to conform to current period presentation.

 

NOTE 2. RENTAL PROPERTIES

 

As of September 30, 2017, the Partnership and its Subsidiary Partnerships owned 2,632 residential apartment units in 22 residential and mixed-use complexes (collectively, the “Apartment Complexes”). The Partnership also owns 19 condominium units in a residential condominium complex, all of which are leased to residential tenants (collectively referred to as the “Condominium Units”). The Apartment Complexes and Condominium Units are located primarily in the metropolitan Boston area of Massachusetts.

 

Additionally, as of September 30, 2017, the Partnership and Subsidiary Partnerships owned a commercial shopping center in Framingham, commercial buildings in Newton and Brookline and mixed-use properties in Boston, Brockton and Newton, all in Massachusetts. These properties are referred to collectively as the “Commercial Properties.”

 

The Partnership also owned a 40% to 50% ownership interest in nine residential and mixed use complexes (the “Investment Properties”) at September 30, 2017 with a total of 739 units, accounted for using the equity method of consolidation. See Note 14 for summary information on these investments.

 

Rental properties consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2017

    

December 31, 2016

    

Useful Life

 

Land, improvements and parking lots

 

$

64,694,380

 

$

52,612,929

 

15

-

40

years

 

Buildings and improvements

 

 

202,705,581

 

 

173,536,288

 

15

-

40

years

 

Kitchen cabinets

 

 

12,585,369

 

 

8,738,323

 

 5

-

10

years

 

Carpets

 

 

9,181,606

 

 

7,621,292

 

 5

-

10

years

 

Air conditioning

 

 

690,535

 

 

690,535

 

 5

-

10

years

 

Laundry equipment

 

 

274,389

 

 

269,784

 

 5

-

 7

years

 

Elevators

 

 

1,139,296

 

 

1,139,296

 

20

-

40

years

 

Swimming pools

 

 

444,629

 

 

444,629

 

10

-

30

years

 

Equipment

 

 

10,816,225

 

 

10,029,639

 

 5

-

30

years

 

Motor vehicles

 

 

237,954

 

 

237,954

 

 

 

 5

years

 

Fences

 

 

37,465

 

 

37,465

 

 5

-

15

years

 

Furniture and fixtures

 

 

9,316,804

 

 

8,127,100

 

 5

-

 7

years

 

Smoke alarms

 

 

659,859

 

 

174,059

 

 5

-

 7

years

 

Total fixed assets

 

 

312,784,092

 

 

263,659,293

 

 

 

 

 

 

Less: Accumulated depreciation

 

 

(103,634,403)

 

 

(94,196,482)

 

 

 

 

 

 

 

 

$

209,149,689

 

$

169,462,811

 

 

 

 

 

 

 

On July 6, 2017, Woodland Park Partners, LLC, a newly formed subsidiary of the Partnership, purchased the Woodland Park Apartments, a 126-unit apartment complex located at 264-290 Grove Street, Newton, Massachusetts (the “Property”), for a purchase price of $45,600,000. The closing costs were approximately $64,000.

 

To fund the purchase price, the Partnership borrowed $25,000,000 under its outstanding line of credit with KeyBank, NA, and $16,000,000 from HBC Holdings, LLC, a Massachusetts limited liability company controlled by Harold Brown. The loan from HBC Holdings will mature on July 16, 2018, with interest only at 4.75%.  The balance of the purchase price was funded by the Partnership’s cash reserves. From the purchase price, the Partnership allocated

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approximately $541,000 for in- place leases, and approximately $42,000 to the value of tenant relationships. These amounts are being amortized over 12 and 24 months respectively.

 

 

 

NOTE 3. RELATED PARTY TRANSACTIONS

 

The Partnership’s properties are managed by an entity that is owned by the majority shareholder of the General Partner. The management fee is equal to 4% of gross receipts of rental revenue and laundry income on the majority of the Partnership’s properties and 3% on Linewt. Total fees paid were approximately $1,600,000 and $1,513,000 for the nine months ended September 30, 2017 and 2016, respectively.

 

The Partnership Agreement permits the General Partner or Management Company to charge the costs of professional services (such as counsel, accountants and contractors) to NERA. During the nine months ended September 30, 2017 and 2016, approximately $609,000 and $772,000, was charged to NERA for legal, accounting, construction, maintenance, brokerage fees, rental and architectural services and supervision of capital improvements. Of the 2017 expenses referred to above, approximately $199,000 consisted of repairs and maintenance, $272,000 of administrative expense and $1,000 for commercial brokerage fees. Approximately $137,000 of expenses for construction, architectural services and supervision of capital projects were capitalized in rental properties. Additionally in 2017, the Hamilton Company received approximately $1,125,000 from the Investment Properties of which approximately $510,000 was the management fee, approximately $34,000 was for maintenance services, approximately $27,000 was for administrative services and approximately $554,000 for architectural services and supervision of capital projects. The management fee is equal to 4% of gross receipts of rental income on the majority of investment properties and 2% on Dexter Park.

 

The Partnership reimburses the management company for the payroll and related expenses of the employees who work at the properties. Total reimbursement was approximately $2,508,000 and $2,212,000 for the nine months ended September 30, 2017 and 2016, respectively. The Management Company maintains a 401K plan for all eligible employees whereby the employees may contribute the maximum allowed by law. The plan also provides for discretionary contributions by the employer. There were no employer contributions during 2017 and 2016.

 

Bookkeeping and accounting functions are provided by the Management Company’s accounting staff, which consists of approximately 14 people. During the nine months ended September 30, 2017 and 2016, the Management Company charged the Partnership $93,750 ($125,000 per year) for bookkeeping and accounting services included in administrative expenses above.

 

The President of the Management Company performs asset management consulting services and receives an asset management fee from the Partnership. The Partnership does not have a written agreement with this individual. During the nine months ended September 30, 2017 and 2016 this individual received fees of $56,250.

 

The Partnership has invested in nine limited partnerships, which have invested in mixed use residential apartment complexes. The Partnership has a 40% to 50% ownership interest in each investment property. The other investors are Harold Brown, the President of the Management Company and five other employees of the Management Company. Harold Brown’s ownership interest is between 43.2% and 56%. See Note 14 for a description of the properties and their operations.

 

NOTE 4. OTHER ASSETS

 

Approximately $2,379,000, and $2,381,000 of security deposits are included in prepaid expenses and other assets at September 30, 2017 and December 31, 2016, respectively. The security deposits and escrow accounts are restricted cash.

 

Included in prepaid expenses and other assets at September 30, 2017 and December 31, 2016 is approximately $326,000 and $423,000, respectively, held in escrow to fund future capital improvements.

 

Intangible assets on the acquisitions of both Woodland Park Apartments and the Residence at Captain Parkers are included in prepaid expenses and other assets.  Intangible assets are approximately $442,000 net of accumulated amortization of approximately $644,000 and approximately $12,000 net of accumulated amortization of approximately $492,000 at September 30, 2017 and December 31, 2016, respectively.

 

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Financing fees in association with the line of credit of approximately $0 and $28,000 are net of accumulated amortization of approximately $141,000 and $113,000 at September 30, 2017 and December 31, 2016 respectively.

 

NOTE 5. MORTGAGE NOTES PAYABLE

 

At September 30, 2017 and December 31, 2016, the mortgages payable consisted of various loans, all of which were secured by first mortgages on properties referred to in Note 2. At September 30, 2017, the interest rates on these loans ranged from 3.24% to 5.97%, payable in monthly installments aggregating approximately $1,060,000 including principal, to various dates through 2029. The majority of the mortgages are subject to prepayment penalties. At September 30, 2017, the weighted average interest rate on the above mortgages was 4.59%. The effective rate of 4.67% includes the amortization expense of deferred financing costs. See Note 12 for fair value information. The Partnership’s mortgage debt and the mortgage debt of its unconsolidated joint ventures generally is non-recourse except for customary exceptions pertaining to misuse of funds and material misrepresentations.

 

Financing fees of approximately $1,461,000 and $1,454,000 are net of accumulated amortization of approximately $1,226,000 and $1,061,000 at September 30, 2017 and December 31, 2016, respectively.

The Partnership has pledged tenant leases as additional collateral for certain of these loans.

 

Approximate annual maturities at September 30, 2017 are as follows:

 

 

 

 

 

 

2018—current maturities

    

$

1,823,000

 

2019

 

 

7,903,000

 

2020

 

 

4,324,000

 

2021

 

 

2,312,000

 

2022

 

 

2,561,000

 

Thereafter

 

 

216,153,000

 

 

 

 

235,076,000

 

Less: unamortized deferred financing costs

 

 

(1,461,000)

 

 

 

$

233,615,000

 

 

On September 29, 2017, Woodland Park Partners LLC, ( “Woodland Park”), entered into a Multifamily Loan and Security Agreement (the “Loan Agreement”) with KeyBank National Association (the “Lender”). The manager of Woodland Park is NewReal, Inc. (“New Real”), the general partner of New England Realty Associates Limited Partnership (the “Partnership”).  The Partnership is the sole member of Woodland Park. The Loan Agreement provides for a term loan (the “Loan”) in the principal amount of $22,250,000.  The Loan is due on October 1, 2027 (the “Due Date”), unless the due date is accelerated in accordance with the Loan’s terms, with interest only through October 1, 2022. Borrowings under the Loan will bear interest at the rate of 3.79%. The proceeds of the loan was used to pay off the loan from HBC Holdings, LLC and pay down the line of credit.

 

On January 7, 2016, Captain Parker entered into a Multifamily Loan and Security Agreement (the “Loan Agreement”) with KeyBank National Association (the “Lender”). The manager of Captain Parker is NewReal, Inc. (“New Real”), the general partner of New England Realty Associates Limited Partnership (the “Partnership”).  The Partnership is the sole member of Captain Parker. The Loan Agreement provides for a term loan (the “Loan”) in the principal amount of $20,071,000.  The Loan is due on February 1, 2026 (the “Due Date”), unless the due date is accelerated in accordance with the Loan’s terms. Borrowings under the Loan will bear interest at rates equal to (i) the one month LIBOR rate for United States Dollar Deposits, determined monthly, plus 201 basis points. The interest rate increases upon an event of default. 

 

Captain Parker is required to repay the aggregate principal amount of the Loan by the Due Date. Interest payments on the Loans are payable monthly in arrears on specified dates set forth in the Loan Agreement. Principal payments on the Loan are also payable monthly commencing on March 1, 2022.  The note issued by Captain Parker in connection with the Loan Agreement (the “Note”) also contains provisions for optional prepayment with a penalty under certain circumstances.

 

 

 

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Line of Credit

On July 31, 2014, the Partnership entered into an agreement for a $25,000,000 revolving line of credit.  The original term of the line was three years with a floating interest rate equal to a base rate of the greater of (a) the Prime Rate (b) the Federal Funds Rate plus one-half of one percent per annum, or (c) the LIBOR Rate for a period of one month plus 1% per annum, plus the applicable margin of 2.5%. The costs associated with the line of credit were approximately $125,000. As of September 30, 2017, the credit line had an outstanding balance of $25,000,000, which was used on July 6, 2017, in conjunction with a loan of $16,000,000 from HBC Holdings, LLC, a Massachusetts Limited Liability company controlled by Harold Brown, and cash reserves, to purchase Woodland Park Partners, LLC (“Woodland Park”).The loan from HBC was paid off on September 29, 2017 from the proceeds of the loan from Keybank. The total interest paid for the HBC loan was approximately $182,000. The Line of Credit was paid down by $8,000,000 on October 5, 2017. The agreement originally expired on July 31, 2017, and has been subsequently until October 31, 2020.

On September 15, 2015, the Partnership, in connection with the purchase of the Residence at Captain Parker Apartments, used the entire line of credit, along with cash reserve, to purchase the property. On January 7, 2016, Captain Parker entered into a Multifamily Loan and Security Agreement (the “Loan Agreement”) with KeyBank National Association (the “Lender”). As a result of securing the financing, the Partnership used the proceeds of the loan and cash reserves of the Partnership to pay down the Line of Credit to zero. A payment was made on January 7, 2016 for $23,000,000, and another payment for $2,000,000 was made on January 15, 2016.

 

On January 7, 2016, Captain Parker entered into a Multifamily Loan and Security Agreement (the “Loan Agreement”) with KeyBank National Association (the “Lender”). As a result of securing the financing, the Partnership used the proceeds of the loan and cash reserves of the Partnership to pay down the Line of Credit to zero. A payment was made on January 7, 2016 for $23,000,000, and another payment for $2,000,000 was made on January 15, 2016.

 

The line of credit may be used for acquisition, refinancing, improvements, working capital and other needs of the Partnership. The line may not be used to pay distributions, make distributions or acquire equity interests of the Partnership.

The line of credit is collateralized by varying percentages of the Partnership’s ownership interest in 23 of its subsidiary properties and joint ventures. Pledged interests range from 49% to 100% of the Partnership’s ownership interest in the respective entities.

The Partnership paid fees to secure the line of credit. Any unused balance of the line of credit is subject to a fee ranging from 15 to 20 basis points per annum. The Partnership paid approximately $38,000 for the nine months ended September 30, 2017.

The line of credit agreement has several covenants, such as providing cash flow projections and compliance certificates, as well as other financial information. The covenants include, but are not limited to the following: maintain a leverage ratio that does not exceed 65%; aggregate increase in indebtedness of the subsidiaries and joint ventures should not exceed $15,000,000; maintain a tangible net worth (as defined in the agreement) of a minimum of $150,000,000; a minimum ratio of net operating income to total indebtedness of at least 9.5%; debt service coverage ratio of at least 1.6 to 1, as well as other items.

The Partnership is in compliance with these covenants as of September 30, 2017.

   NOTE 6. ADVANCE RENTAL PAYMENTS AND SECURITY DEPOSITS

 

The Partnership’s residential lease agreements may require tenants to maintain a one-month advance rental payment and/or a security deposit. At September 30, 2017, amounts received for prepaid rents of approximately $2,072,000 are included in cash and cash equivalents, and security deposits of approximately $2,379,000 are included in prepaid expenses and other assets and are restricted cash.

 

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NOTE 7. PARTNERS’ CAPITAL

 

The Partnership has two classes of Limited Partners (Class A and B) and one category of General Partner. Under the terms of the Partnership Agreement, distributions to holders of Class B Units and General Partnership Units must represent 19% and 1%, respectively, of the total units outstanding. All classes have equal profit sharing and distribution rights, in proportion to their ownership interests.

 

In 2017, the Partnership announced the approval of a quarterly distribution of its Class A Limited Partners and holders of Depositary Receipts of record as of March 15, 2017, June 15, 2017, and September 15, 2017,  and payable on March 31, 2017, June 30, 2017, and September 30, 2017 of $9.00 per unit ($0.30 per receipt).

In 2016, regular quarterly distributions of $7.50 per unit ($0.25 per receipt) were paid in March, June, September and December. In December 2016, the Partnership paid a special distribution of $24.00 per unit ($0.80 per receipt). In 2016, the Partnership paid a total distribution of an aggregate of $54.00 per unit ($1.80 per Receipt).

The Partnership has entered into a deposit agreement with an agent to facilitate public trading of limited partners’ interests in Class A Units. Under the terms of this agreement, the holders of Class A Units have the right to exchange each Class A Unit for 30 Depositary Receipts. The following is information per Depositary Receipt:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

2017

    

2016

 

Net Income per Depositary Receipt

 

$

1.41

 

$

0.91

 

Distributions per Depositary Receipt

 

$

0.90

 

$

0.75

 

 

 

 

NOTE 8. TREASURY UNITS

 

Treasury Units at September 30, 2017 are as follows:

 

 

 

 

 

Class A

    

44,671

 

Class B

 

10,609

 

General Partnership

 

559

 

 

 

55,839

 

 

On August 20, 2007, NewReal, Inc., the General Partner authorized an equity repurchase program (“Repurchase Program”) under which the Partnership was permitted to purchase, over a period of twelve months, up to 300,000 Depositary Receipts (each of which is one-tenth of a Class A Unit). Over time, the General Partner has authorized increases in the equity repurchase program. On March 10, 2015, the General Partner authorized an increase in the Repurchase Program from 1,500,000 to 2,000,000 Depository Receipts and extended the Program for an additional five years from March 31, 2015 until March 31, 2020. The Repurchase Program requires the Partnership to repurchase a proportionate number of Class B Units and General Partner Units in connection with any repurchases of any Depositary Receipts by the Partnership based upon the 80%, 19% and 1% fixed distribution percentages of the holders of the Class A, Class B and General Partner Units under the Partnership’s Second Amended and Restate Contract of Limited Partnership. Repurchases of Depositary Receipts or Partnership Units pursuant to the Repurchase Program may be made by the Partnership from time to time in its sole discretion in open market transactions or in privately negotiated transactions. From August 20, 2007 through September 30, 2017, the Partnership has repurchased 1,365,306 Depositary Receipts at an average price of $27.14 per receipt (or $814.20 per underlying Class A Unit), 3,072 Class B Units and 162 General Partnership Units, both at an average price of $926.26 per Unit, totaling approximately $40,274,000 including brokerage fees paid by the Partnership.

 

During the nine months ended September 30, 2017, the Partnership purchased a total of 549 Depositary Receipts. The average price was $62.00 per receipt or $1,860.00 per unit. The total cost including commission was $34,038. The Partnership was required to repurchase 4.3 Class B Units and 0.2 General Partnership units at a cost of $8,084 and $425 respectively.

 

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NOTE 9. COMMITMENTS AND CONTINGENCIES

 

From time to time, the Partnership is involved in various ordinary routine litigation incidental to its business. The Partnership either has insurance coverage or provides for any uninsured claims when appropriate. The Partnership is not involved in any material pending legal proceedings.

 

On November 19, 2016, a pipe broke at 62 Boylston Street in Boston, MA. resulting in water damage to 24  apartments. The Partnership has insurance coverage on both the repairs and rental loss. As of September 30, 2017, the claim has been settled and the Partnership has received payments of approximately $358,000.

 

NOTE 10. RENTAL INCOME

 

During the nine months ended September 30, 2017, approximately 93% of rental income was related to residential apartments and condominium units with leases of one year or less. The majority of these leases expire in June, July and August. Approximately 7% was related to commercial properties, which have minimum future annual rental income on non-cancellable operating leases at September 30, 2017 as follows:

 

 

 

 

 

 

 

    

Commercial

 

 

 

Property Leases

 

2018

 

$

2,697,000

 

2019

 

 

2,248,000

 

2020

 

 

1,687,000

 

2021

 

 

1,396,000

 

2022

 

 

570,000

 

Thereafter

 

 

313,000

 

 

 

$

8,911,000

 

 

The aggregate minimum future rental income does not include contingent rentals that may be received under various leases in connection with common area charges and real estate taxes. Aggregate contingent rentals from continuing operations were approximately $495,000 and $444,000 for the nine months ended September 30, 2017 and 2016 respectively. Staples and Trader Joes, tenants at Staples Plaza, are approximately 31% of the total commercial rental income.

 

The following information is provided for commercial leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Annual base

    

 

    

 

    

Percentage of

 

 

 

rent for

 

Total square feet

 

Total number of

 

annual base rent for

 

Throguh September 30,

 

expiring leases

 

for expiring leases

 

leases expiring

 

expiring leases

 

2018

 

$

468,209

 

18,003

 

12

 

16

%

2019

 

 

672,327

 

24,179

 

12

 

23

%

2020

 

 

215,902

 

6,428

 

 6

 

7

%

2021

 

 

791,294

 

34,511

 

 7

 

27

%

2022

 

 

519,397

 

16,343

 

 6

 

17

%

2023

 

 

58,500

 

1,950

 

 1

 

2

%

2024

 

 

251,627

 

6,629

 

 2

 

8

%

2025

 

 

 —

 

 —

 

 —

 

0

%

2026

 

 

 —

 

 —

 

 —

 

0

%

2027

 

 

 —

 

 —

 

 —

 

0

%

Totals

 

$

2,977,256

 

108,043

 

46

 

100

%

 

Rents receivable are net of an allowance for doubtful accounts of approximately $801,000 and $523,000 at September 30, 2017 and December 31, 2016. Included in rents receivable at September 30, 2017 is approximately $130,000 resulting from recognizing rental income from non-cancelable commercial leases with future rental increases on a straight-line basis. The majority of this amount is for long-term leases at 62 Boylston Street in Boston, Massachusetts.

 

Rents receivable at September 30, 2017 also includes approximately $95,000 representing the deferral of rental concession primarily related to the residential properties.

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NOTE 11. CASH FLOW INFORMATION

 

During the nine months ended September 30, 2017 and 2016, cash paid for interest was approximately $7,802,000, and $7,457,000 respectively.  Cash paid for state income taxes was approximately $61,000 and $42,000 during the nine months ended September 30, 2017 and 2016 respectively.

 

NOTE 12. FAIR VALUE MEASUREMENTS

 

Fair Value Measurements on a Recurring Basis

 

At September 30, 2017 and December 31, 2016, we do not have any significant financial assets or financial liabilities that are measured at fair value on a recurring basis in our consolidated financial statements.

 

Financial Assets and Liabilities not Measured at Fair Value

 

At September 30, 2017 and December 31, 2016 the carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts receivable, and note payable, accounts payable and accrued expenses were representative of their fair values due to the short-term nature of these instruments or, the recent acquisition of these items.

 

At September 30, 2017 and December 31, 2016, we estimated the fair value of our mortgages payable and other notes based upon quoted market prices for the same (Level 1) or similar (Level 2) issues when current quoted market prices are available. We estimated the fair value of our secured mortgage debt that does not have current quoted market prices available by discounting the future cash flows using rates currently available to us for debt with similar terms and maturities (Level 3). The differences in the fair value of our debt from the carrying value are the result of differences in interest rates and/or borrowing spreads that were available to us at September 30, 2017 and December 31, 2016, as compared with those in effect when the debt was issued or acquired. The secured mortgage debt contain pre-payment penalties or yield maintenance provisions that could make the cost of refinancing the debt at lower rates exceed the benefit that would be derived from doing so.

 

The following methods and assumptions were used by the Partnership in estimating the fair value of its financial instruments:

 

·

For cash and cash equivalents, accounts receivable, other assets, investment in partnerships, accounts payable, advance rents and security deposits: fair value approximates the carrying value of such assets and liabilities.

 

·

For mortgage notes payable: fair value is generally based on estimated future cash flows, which are discounted using the quoted market rate from an independent source for similar obligations. Refer to the table below for the carrying amount and estimated fair value of such instruments.

 

The following table reflects the carrying amounts and estimated fair value of our debt.

 

 

 

 

 

 

 

 

 

 

    

Carrying Amount

    

Estimated Fair Value

 

Mortgage Notes Payable

 

 

 

 

 

 

 

Partnership Properties

 

 

 

 

 

 

 

At September 30, 2017

*

$

233,615,499

 

$

240,513,012

 

At December 31, 2016

*

$

212,709,080

 

$

219,086,450

 

Investment Properties

 

 

 

 

 

 

 

At September 30, 2017

*

$

124,550,899

 

$

127,162,361

 

At December 31, 2016

*

$

130,152,297

 

$

133,991,269

 

 

* Net of unamortized deferred financing costs

 

Disclosure about fair value of financial instruments is based on pertinent information available to management as of September 30, 2017 and December 31, 2016. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these

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financial statements since September 30, 2017 and current estimates of fair value may differ significantly from the amounts presented herein.

 

 NOTE 13. TAXABLE INCOME AND TAX BASIS

 

Taxable income reportable by the Partnership and includable in its partners’ tax returns is different than financial statement income because of tax free exchanges, accelerated depreciation, different tax lives, timing differences related to prepaid rents, allowances and intangible assets related to significant acquisitions and the treatment of certain expenditures. Taxable income of approximately $4,893,000 was approximately $57,000 less than statement income for the year ended December 31, 2016. The primary reason for the difference was due to accelerated depreciation, tax free exchange and other differences in the treatment of certain expenditures. Substantial property acquisitions could also cause a significant difference between book and tax depreciation. The cumulative tax basis of the Partnership’s real estate at December 31, 2016 is approximately $7,200,000 less than the statement basis. The primary reasons for the lower tax basis were tax free exchanges, and accelerated depreciation. The Partnership’s tax basis in its joint venture investments is approximately $2,100,000 less than statement basis because of accelerated depreciation.

 

Certain entities included in the Partnership’s consolidated financial statements are subject to certain state taxes. These taxes are not significant and are recorded as operating expenses in the accompanying consolidates financial statements.

 

While allowable accelerated depreciation deductions were extended, future tax law changes may significantly affect taxable income.

The Partnership adopted the amended provisions related to uncertain tax provisions of ASC 740, Income Taxes. As a result of the implementation of the guidance, the Partnership recognized no material adjustment regarding its tax accounting treatment. The Partnership expects to recognize interest and penalties related to uncertain tax positions, if any, as income tax expense, which would be included in general and administrative expense.

 

In the normal course of business the Partnership or one of its subsidiaries is subject to examination by federal, state and local jurisdictions in which it operates, where applicable. As of September 30, 2017, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are from the year 2013 forward.

 

NOTE 14. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

 

Since November 2001,the Partnership has invested in nine limited partnerships and limited liability companies, the majority of which have invested in residential apartment complexes, with three partnerships investing in commercial property. The Partnership has between a 40%-50% ownership interest in each investment. The other investors are Harold Brown, the President of the Management Company and five other employees of the Management Company. Harold Brown’s ownership interest is between 43.2% and 56%, with the balance owned by the others. A description of each investment is as follows:

 

On October 28, 2009 the Partnership invested approximately $15,925,000 in a joint venture to acquire a 40% interest in a residential property located in Brookline, Massachusetts. The property, Hamilton Park Towers LLC, referred to as Dexter Park, is a 409 unit residential complex. The purchase price was $129,500,000. The total mortgage was $89,914,000 with an interest rate of 5.57% and it matures in 2019. The mortgage calls for interest only payments for the first two years of the loan and amortized over 30 years thereafter. The balance of this mortgage before unamortized deferred financing costs is approximately $82,390,000 at September 30, 2017.  This investment, Hamilton Park Towers, LLC is referred to as Dexter Park.

On October 3, 2005, the Partnership invested $2,500,000 for a 50% ownership interest in a 168-unit apartment complex in Quincy, Massachusetts. The purchase price was $30,875,000. The Joint Venture sold 120 units as condominiums and retained 48 units for long-term investment. In February 2007, the Joint Venture refinanced the 48 units with a new mortgage in the amount of $4,750,000 with an interest rate of 5.57%, interest only for five years. The loan was to be amortized over 30 years thereafter and matured in March, 2017. On March 1, 2017, the mortgage balance was paid in full, with the Partnership contributing its share of the mortgage balance of approximately $2,222,000. As of September 30, 2017, 18 units were sold with a gain on the sales of approximately $2,355,000. An additional 6 units are under purchase and sale agreements, and the Partnership still owns 26 units. This investment is referred to as Hamilton Bay Apartments, LLC.

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In April 2008, a Joint Venture refinanced an additional 20 units and obtained a new mortgage in the amount of $2,368,000 with interest at 5.75%, interest only, which matured in 2013. On October 18, 2013, the Partnership and its joint venture partner each made capital contributions to the entity of $660,000. The capital was used to pay off the outstanding mortgage. During 2017, 1 unit was sold resulting in a gain of approximately $93,000.  As of August 1, 2017, all units have been sold by this Joint Venture. This investment is referred to as Hamilton Bay, LLC.

 

On March 7, 2005, the Partnership invested $2,000,000 for a 50% ownership interest in a building comprising 48 apartments, one commercial space and a 50-car surface parking lot located in Boston, Massachusetts. The purchase price was $14,300,000, with a $10,750,000 mortgage. The Joint Venture planned to operate the building and initiate development of the parking lot. In June 2007, the Joint Venture separated the parcels, formed an additional limited liability company for the residential apartments and obtained a mortgage on the property. The new limited liability company formed for the residential apartments and commercial space is referred to as Hamilton Essex 81, LLC. In August 2008, the Joint Venture restructured the mortgages on both parcels at Essex 81. On September 28, 2015, Hamilton Essex Development, LLC paid off the outstanding mortgage balance of $1,952,286.  The Partnership made a capital contribution of $978,193 to Hamilton Essex Development LLC for its share of the funds required for the transaction.  Additionally, the Partnership made a capital contribution of $100,000 to Hamilton Essex 81, LLC.  On September 30, 2015, Hamilton Essex 81, LLC obtained a new 10 year mortgage in the amount of $10,000,000, interest only at 2.18% plus the one month Libor rate. The proceeds of the note were used to pay off the existing mortgage of $8,040,719 and the Partnership received a distribution of $978,193 for its share of the excess proceeds. As a result of the distribution, the carrying value of the investment fell below zero. The Partnership will continue to account for this investment using the equity method of accounting. Although the Partnership has no legal obligation, the Partnership intends to fund its share of any future operating deficits if needed. The investment in the parking lot is referred to as Hamilton Essex Development, LLC; the investment in the apartments is referred to as Hamilton Essex 81, LLC. At September 30, 2017, the balance on this mortgage before unamortized deferred financing costs is approximately $10,000,000.

 

On March 2, 2005, the Partnership invested $2,352,000 for a 50% ownership interest in a 176‑unit apartment complex with an additional small commercial building located in Quincy, Massachusetts. The purchase price was $23,750,000. The Joint Venture sold 127 of the units as condominiums and retained 49 units for long‑term investment. The Joint Venture obtained a new 10‑year mortgage in the amount of $5,000,000 on the units to be retained by the Joint Venture. The interest on the new loan was 5.67% fixed for the 10 year term with interest only payments for five years and amortized over a 30 year period for the balance of the loan term. On July 8, 2016, Hamilton 1025 LLC paid off the outstanding balance of the mortgage balance. The Partnership made a capital contribution of $2,359,500 to Hamilton 1025, LLC for its share of the funds required for the transaction. Ten units were sold in the year ended December 31, 2016 with a gain on the sales of approximately $1,324,000. As of September 30, 2017, 15 units were sold in 2017 with a gain on the sales of approximately $1,788,000. 4 units are under purchase and sales agreements and the Partnership still owns 20 units. This investment is referred to as Hamilton 1025, LLC.

In September 2004, the Partnership invested approximately $5,075,000 for a 50% ownership interest in a 42‑unit apartment complex located in Lexington, Massachusetts. The purchase price was $10,100,000. In October 2004, the Joint Venture obtained a mortgage on the property in the amount of $8,025,000 and returned $3,775,000 to the Partnership. The Joint Venture obtained a new 10- year mortgage in the amount of $5,500,000 in January 2007. The interest on the new loan was 5.67% fixed for the ten year term with interest only payments for five years and amortized over a 30 year period for the balance of the loan. This loan required a cash contribution by the Partnership of $1,250,000 in December 2006. On September 12, 2016, the property was refinanced with a 15 year mortgage in the amount of $6,000,000, at 3.71%, interest only. The Joint Venture Partnership paid off the prior mortgage of approximately $5,158,000 with the proceeds of the new mortgage and made a distribution of $385,000 to the Partnership. The cost associated with the refinancing was approximately $123,000. This investment is referred to as Hamilton Minuteman, LLC. At September 30, 2017, the balance on this mortgage before unamortized deferred financing costs is approximately $6,000,000.This investment is referred to as Hamilton Minuteman, LLC.

In August 2004, the Partnership invested $8,000,000 for a 50% ownership interest in a 280‑unit apartment complex located in Watertown, Massachusetts. The total purchase price was $56,000,000. The Joint Venture sold 137 units as condominiums. The assets were combined with Hamilton on Main Apartments. Hamilton on Main, LLC is known as Hamilton Place. In 2005, Hamilton on Main Apartments, LLC obtained a ten year mortgage on the three buildings to be retained. The mortgage was $16,825,000, with interest only of 5.18% for three years and amortizing on a 30 year schedule for the remaining seven years when the balance is due. The net proceeds after funding escrow accounts

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and closing costs on the mortgage were approximately $16,700,000, which were used to reduce the existing mortgage. In August 2014, the property was refinanced with a 10 year mortgage in the amount of $16,900,000 at 4.34% interest only.  The Joint Venture paid off the prior mortgage of approximately $15,205,000 with the proceeds of the new mortgage and distributed $850,000 to the Partnership. The costs associated with the refinancing were approximately $161,000. At September 30, 2017, the balance of the mortgage before unamortized deferred financing costs is approximately $16,900,000.

In November 2001, the Partnership invested approximately $1,533,000 for a 50% ownership interest in a 40-unit apartment building in Cambridge, Massachusetts. In June 2013, the property was refinanced with a 15 year mortgage in the amount of $10,000,000 at 3.87%, interest only for 3 years and is amortized on a 30-year schedule for the balance of the term. The Joint Venture paid off the prior mortgage of approximately $6,776,000 with the proceeds of the new mortgage. After the refinancing, the Joint Venture made a distribution of $1,610,000 to the Partnership. As a result of the distribution, the carrying value of the investment fell below zero. The Partnership will continue to account for this investment using the equity method of accounting. Although the Partnership has no legal obligation, the Partnership intends to fund its share of any future operating deficits if needed. At September 30, 2017, the balance of this mortgage before unamortized deferred financing costs is approximately $9,789,000. This investment is referred to as 345 Franklin, LLC.

 

Summary financial information as of September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

Hamilton

  

 

 

  

 

 

  

Hamilton

  

 

 

  

Hamilton

  

Hamilton

  

 

 

  

 

 

 

 

 

Hamilton

 

Essex

 

345

 

Hamilton

 

Bay

 

Hamilton

 

Minuteman

 

on Main

 

Dexter

 

 

 

 

 

 

Essex 81

 

Development

 

Franklin

 

1025

 

Sales

 

Bay Apts

 

Apts

 

Apts

 

Park

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental Properties

  

$

7,704,425

  

$

2,622,401

  

$

6,408,017

  

$

2,155,441

  

$

0

  

$

3,438,875

  

$

5,953,334

  

$

17,776,990

  

$

90,176,965

  

$

136,236,448

 

Cash & Cash Equivalents

 

 

147,083

 

 

92,180

 

 

67,653

 

 

200,845

 

 

20,890

 

 

583,983

 

 

55,114

 

 

33,918

 

 

666,543

 

 

1,868,209

 

Rent Receivable

 

 

17,530

 

 

 —

 

 

32,797

 

 

10,388

 

 

1,480

 

 

7,110

 

 

4,291

 

 

16,545

 

 

122,640

 

 

212,781

 

Real Estate Tax Escrow

 

 

103,996

 

 

 —

 

 

47,566

 

 

 —

 

 

 —

 

 

0

 

 

22,865

 

 

220,804

 

 

297,259

 

 

692,490

 

Prepaid Expenses & Other Assets

 

 

120,823

 

 

1115

 

 

59,633

 

 

704,019

 

 

263

 

 

501,895

 

 

34,110

 

 

99,569

 

 

1,405,528

 

 

2,926,955

 

Total Assets

 

$

8,093,857

 

$

2,715,696

 

$

6,615,666

 

$

3,070,693

 

$

22,633

 

$

4,531,863

 

$

6,069,714

 

$

18,147,826

 

$

92,668,935

 

$

141,936,883

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Notes Payable

 

$

9,889,687

 

$

 —

 

$

9,717,606

 

$

 —

 

$

 —

 

$

 —

 

$

5,885,772

 

$

16,788,979

 

$

82,268,855

 

$

124,550,899

 

Accounts Payable & Accrued Expense

 

 

90,779

 

 

1,276

 

 

78,848

 

 

35,139

 

 

1,671

 

 

28,806

 

 

68,147

 

 

159,754

 

 

784,992

 

 

1,249,412

 

Advance Rental Pmts & Security Deposits

 

 

179,143

 

 

 —

 

 

229,169

 

 

25,656

 

 

101

 

 

25,355

 

 

96,224

 

 

365,091

 

 

2,329,431

 

 

3,250,170

 

Total Liabilities

 

 

10,159,609

 

 

1,276

 

 

10,025,623

 

 

60,795

 

 

1,772

 

 

54,161

 

 

6,050,143

 

 

17,313,824

 

 

85,383,278

 

 

129,050,481

 

Partners’ Capital

 

 

(2,065,752)

 

 

2,714,420

 

 

(3,409,957)

 

 

3,009,898

 

 

20,861

 

 

4,477,702

 

 

19,571

 

 

834,002

 

 

7,285,657

 

 

12,886,402